As a small business owner, you understand the importance of financial responsibility and resource management.

However, saving and paying for your, your child’s, spouse’s or another dependent’s higher education requires specialized knowledge and support. You need to have a comprehensive savings plan and understand the complexities of financial aid eligibility and tax liability.

Luckily, there are many great ways to save, secure aid, leverage tax implications and minimize debt your student incurs.

Important Terms

Before we get started, there are a few terms we must clearly define:

• Financial aid – Scholarships, grants or loans that help fund post-secondary education.
• Federal Application for Federal Student Aid (FAFSA) – An application students fill out before each school year to determine their federal financial aid eligibility.
• Student Aid Index (SAI) – The rating based on a student’s FAFSA that indicates how much aid a student needs. The lower the score, the more eligible they are for assistance.

General Advice

Here are some planning tips and considerations:

Start Early

The earlier you start saving and investing funds, the more time your money has to grow. Also, colleges use income from the prior two years to determine eligibility, so you should start devising income and tax-affective strategies well in advance.

Open a 529 Account

A 529 is a tax-advantaged savings plan and one of the most common ways families save for college. Consult a tax professional to help you devise a tax-efficient plan and maximize American Opportunity Tax Credit benefits.

If your child’s grandparents opened a 529 for your children, tell them to leave the account alone until they submit their FAFSA for their last year of school or use the money as a post-grad gift. Because once the money is withdrawn, it can heavily affect your child’s FAFSA assessment.

Learn your Target Schools’ Reduction Methods

Every school calculates aid differently. Research the methods of your student’s top choices to develop more specific financial plans.

Financial Aid Appeal Awards

It is possible to get additional relief from schools after your student receives their first FAFSA offer or if you’re faced with unexpected expenses. However, talk to a college financial advisor before you draft or submit an appeals letter.

Income Diversion and Tax-Advantaged Strategies

Reduce your student’s SAI and get the most out of your money with these practices:

Hire your Student

Employing and paying your student means your income is still going toward their college savings, except you and your student can reduce your tax liabilities in several ways:

• Your student will be in a lower tax bracket.
• Your student can earn up to $14,600 before incurring federal income taxes in 2024.
• Your business’s taxable profits may decrease.

Other important considerations:

• Understand the Child Tax Credit (CTC) under the Tax Cuts and Jobs Act.
• Explore Section 127 and Section 132 of the Internal Revenue Code.
• Work with an experienced financial advisor to reduce your child’s tax liability under the “kiddie tax.”

Taking full advantage of tax breaks and following the rules can be challenging; consult a tax expert for help implementing the best strategies for your situation.

Leave Your Retirement Savings Alone

The IRS may waive the 10% penalty for early withdrawal because funds are being used for college payments, but it will increase your income, which drives up your student’s SAI. Plus, diminishing your savings is not a good idea if you want to retire comfortably.

Set Up a Personal Roth IRA Account for your Student

Personal accounts don’t factor into SAI; your student can use them for qualified education expenses without a penalty, even if they withdraw before age 59 and a half.

Gift-Leaseback Transaction

This is when you gift your student property, and they lease it back to you. Through lease payments to the student, you can divert your income to the student’s college savings and lower your tax liability. It’s important to note that the IRS closely monitors these transactions to ensure payments are reasonable.

Restructure your Business Legally

Changing the legal structure of your business can reduce your gross income and your student’s SAI.

If your business isn’t already an S Corporation or C Corporation, consider converting to one of those business types, which would allow you to reduce your gross income, save non-retirement assets or pass savings off to your student as stock or interest in your business.

Gift your Student Company Stock

You can sell stock and gift the proceeds to your student or allow them to sell it to cover their college expenses. However, this can come with some limits — such as the kiddie tax, gift tax stipulations and reduced financial aid awards.

Educate yourself About Reduction Strategies

Do not attempt any of the aforementioned strategies without consulting an experienced college planning specialist and tax professional. Proceeding with the proper support will ensure you save and allocate your money efficiently for your, your child’s, spouse’s or another dependent’s education.

Other Sources

• How to negotiate college’s financial aid offers
• Learn more about setting up educational assistance plans
• Tax Cuts and Jobs Act (TCJA)

If you thought this article was helpful and informative, visit southernconsumers.org to learn more about how the Southern Consumers Alliance can support you.